Question

On December 31, 2017, Flint Company signed a $ 1,038,100 note to Buffalo Bank. The market interest rate at that time was 11%. The stated interest rate on the note was  9%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Flint’s financial situation worsened. On December 31, 2019, Buffalo Bank determined that it was probable that the company would pay back only $ 622,860 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $ 1,038,100 loan.

Determine the amount of cash Flint received from the loan on December 31, 2017.

Prepare a note amortization schedule for Buffalo Bank up to December 31, 2019.

Determine the loss on impairment that Buffalo Bank should recognize on December 31, 2019

Answer 1

Part A

Cash received by Flint Company on December 31, 2017:

Present value of principal ($1,038,100 * pvif(11%,5yrs) 0.59345) = 616060

Present value of interest ($(1038100*9%) * pvifa(11%,5yrs) 3.69590) = 345304

Cash received = 961364

Part B

Note Amortization Schedule

(Before Impairment)

Date	cash received (9%)	interested revenue (11%)	carrying amount
December 31, 2017			961364
December 31, 2018	93429 (1038100*9%)	105750 (961364*11%)	973685 (961364+(105750-93429))
December 31, 2019	93429 (1038100*9%)	107105	987361 (973685+(107105-93429))

Part C

Loss due to impairment:

Carrying amount of loan (12/31/19).... $987361

Less: Present value of $600,000 due in 3 years ($622860 *pvif(11%,3yrs) 0.73119) = 455429

Present value of $93429 payable annuallyfor 3 years ($93429 *pvifa(11%,3yrs) 2.44371) = 228313

Loss due to impairment = $303619